2 Is it the same as the previous index? e) Would it make sense to COMPARE the index number of the two price indexes. Explain. TASK 4 - ANSWER THE FOLLOWING QUESTIONS ABOUT INFLATION : 1. Last year, the Consumer Price Index (CPI) was 2. If nominal GDP is $5 trillion in year 1, and real 120 and Bob's household earned $80,000. GDP is $ trillion, then the GDP Deflator is: Assuming this year's CPI is 130, what would Bob's A. $5 trillion - $ trillion = $ trillion household need to earn in order to have the B. $5 trillion + $ trillion = $ trillion same purchasing power as last year? C. $5 trillion / $ trillion = around A. about $87,000 D. $1 trillion / $ trillion = about . B. $80,000 E. the GDP deflator only applies to deflation C. $61,538. D. about $51,000. E. $78,000. 3. In year 1, nominal GDP is $5,000, while real GDP 4. Economists use real GDP because is $4,500. In year 2, nominal GDP is $5,500, while A. this measure of economic output is more real GDP is $4,800. Which of the following realistic than marginal GDP.

3 Statements is true? B. it removes all of the purchases the A. not enough information to answer government makes but leaves in the B. Real GDP grew by more than nominal GDP did. purchases of consumers and businesses C. Nominal GDP grew by more than real GDP did. C. price controls may interfere with the actual D. Nominal and real GDP grew by the same amount. level of demand E. INFLATION was negative. D. the Federal Reserve agreed on this standard in 1959. E. using nominal GDP can create a false impression of the amount of output happening in the economy from one year to another 5. What is the major drawback of using nominal 6. Using the chart below, which statement is true GDP to measure the economic output of a regarding wages over the 3-year period? nation? A. most countries only use Real GDP, therefore nations should keep up with other nations B. It creates a false impression of the amount of output taking place from one year to the A. nominal wages rose while real wages stayed the next because of the change in prices.

4 Same. C. as its name suggest, it only shows nominal B. nominal wages rose by 30%. amounts of production C. real wages rose, but nominal wages stayed the D. Nominal GDP includes goods that were same. produced outside the nation, while Real GDP D. nominal wages fell by 30%. does not E. real wages went down. E. It creates a false impression of the quantities of goods sold because it only measures the costs and not the revenue 7. When actual INFLATION is higher than expected INFLATION , A. real wages stay the same B. real wealth increases C. a redistribution of wealth takes place between banks and the government D. A redistribution of wealth takes place between savers to borrowers E. real wages go u

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